Should You Hedge Against A Rising NZD?
The NZ dollar has risen some 31% against the US dollar over the past year and 12% against the Australian dollar. Now
that this big move has occurred exporters are asking whether they should hedge against further rises. This follows the
emotive decision of some not to hedge 2-3 years ago after they got hit by the sharp fall in the NZD from US 70 cents at
the end of 1996 to US 39 cents come late-2000. The problem many exporters have is that they think their hedging decision
should be based upon where the NZD looks like going. If us forecasters say it is over-valued and looks like going down
the inclination will be not to hedge. And if we say it looks like going up then maybe they take extra hedging.
To help exporters (and importers) in their currency hedging decisions we offer the following food for thought.
Rule 1 A currency view should have only a 5% weighting in the hedging decision-making process. The focus should be on
the ability of one’s bottom-line to handle unpredictable adverse currency movements not the scope for profit if one gets
an exchange rate forecast right.
Rule 2 No-one gets it right. The year ahead consensus forecast of the NZD/USD exchange rate has been correct only four
times the past six years while the two year ahead forecast has been correct only once. This can be seen in the following
graph. The solid blue line shows the difference between the NZD/USD exchange rate in a particular month and the
consensus view of us economists on where the rate would be that month in a survey done one year earlier. The dotted line
uses the survey done two years earlier. The results are not encouraging for those who believe we economists know where
currencies are headed. Rule 3 Forecasting is simplistic so don’t get fascinated by the verbese. The graph below reveals
we economists simply adjust the view up or down depending on whether the actual rate has gone up or down. Forecasts are
generally below current levels when we feel the NZD is over-valued, and above it when we feel the NZD is undervalued –
though we don’t have data before 1997 to prove that former claim.
Rule 4 Don’t believe those who say the NZD is now “settling down” (a common view some 2-3 years ago) and therefore
hedging is not required. The next graph plots the monthly range of movement of the NZD against the greenback over the
past four years. There is no trend toward reduced volatility. The average range for the entire period is 2.1 years with
2.2 for 1999-00 and 2.0 for 2001-02 – not a particularly large change. Rule 5 No matter how strong the evidence, people
still want exchange rate predictions. Here goes.
The NZD is right on the post-March 1985 float average of US 56.4 cents. We went some
20% below that to US 45 cents in mid-1985, 25% above the average at US 70 cents in mid-1988, 10% below at US 51 cents in
early-1993, 26% above at US 71 cents in late-1996, then 29% under at US 39 cents in late-2000.
Support from here will come from high relative interest rates low relative current account deficit very good relative
fiscal accounts distance from bad events overseas momentum the USD correcting from an over-valued position which has
caused their current account to blow out.
But we expect improving US growth from late this year to eat into all but the third factor above and start pulling the
NZD back over 2004. The risk however is the NZD keeps rising as US growth disappoints. As an exporter receiving USDs
using this view one would hedge expected receipts at current rates out to the end of 2004. Once the NZD hits US 60 cents
one would move to below average hedging for periods beyond 12 months, reducing hedging further for each additional cent
rise in the rate above US 60 cents.
Against the Australian dollar one would be hedged for the next six months but ease off after that in expectation of the
AUD catching up to the NZD’s rise (which it did to a certain degree this week).
These hedging possibilities however are based upon an exporter locking in the forward rate of exchange. A better
practice and one which accurately reflects the unpredictability of exchange rate movements is to take out currency
insurance as a standard practice – as one does with house or contents insurance for instance.
Are Kiwis Flocking Back Home?
One of the key claims many people have made in recent times has been that the September 11 events and worries generally
about terrorism etc. offshore have caused a flood of family-building Kiwis back to the good old environmentally friendly
homeland. Do the data support this view? Only marginally. On average over the past decade the gross flow of Kiwi
nationals (Kiwis) back into NZ after being offshore has been 22,792. The flow in the year to January 2003 was 25,543 so
it was above average. The flow was also above the 21,632 inflow in the year to August 2001 – but not tremendously so. If
the returning Kiwi story were true then one might expect to see a blip up in the proportion of all immigrants accounted
for by returning Kiwis. The second graph below showing this percentage reveals no such blip.
Our conclusion, while the gross inflow of Kiwis recently has been about 12% above the decade average this is not out of
the ordinary and there has been no rise in the proportion of all immigrants accounted for by returning Kiwis. There is
no strong basis for the returning Kiwi story.
The far greater change in fact has been in the drop in the number of Kiwis leaving our shores to 41,386 in the year to
January from 53,019 a year ago and an average of 44,643 the past ten years.